m 


PRINCIPLES 


OF 


COST 


By  J.  W.  McCALL 


PRINTED  AND  CIRCULATED  BY  THE 
BUREAU  OF  PUBLICITY 

NATIONAL  CANNERS 
ASSOCIATION 

BEL  AIR,  MARYLAND 


PRINCIPLES  OF  COST 


ADDRESS   BY 

MR.  J.  W.  MCCALL,  GIBSON  CITY,  ILLINOIS 


DELIVERED   AT 

NATIONAL  CANKERS  CONVENTION 

MILWAUKEE 

1911 


PRINTED  AND  CIRCULATED  BY  THE 
BUREAU    OF    PUBLICITY 

NATIONAL  CANNERS  ASSOCIATION 
BEL  AIR,  MD. 


PRINCIPLES  OF  COST. 

Mr.  President  and  Gentlemen: 

Unfortunately,  I  am  on  the  program  for  a  paper  on  the  theory 
of  cost,  which  is  a  topic  of  such  vital  interest  to  every  member  of 
the  canning  fraternity  that  I  feel  altogether  unqualified  to  handle 
the  subject  in  a  manner  which  its  importance  deserves.  However, 
having  been  assigned  this  task,  I  will  use  my  best  endeavors  to 
throw  some  light  on  the  matter,  and  to  especially  dwell  on  some 
phases  of  a  science  of  cost-finding  which,  I  am  inclined  to  think, 
have  unfortunately  escaped  the  attention  of  many  packers.  There 
seems  to  be  a  tendency  upon  the  part  of  the  packer  to  underesti- 
mate, rather  than  overestimate,  his  cost;  with  a  view  of  making 
himself  believe  that  he  can  undersell,  or  at  least  meet  the  price  of, 
competitors.  The  worst-fooled  man  is  the  man  who  fools  himself, 
and  the  sooner  every  packer  gets  his  business  established  on  the 
basis  of  his  own  cost,  as  determined  and  proven  when  his  books 
are  closed  at  the  end  of  the  year,  the  quicker  will  the  canned-goods 
industry  get  down  on  a  stable  and  profitable  basis  like  that  enjoyed 
in  many  other  lines  of  manufacture. 

The  utter  lack  of  system  and  knowledge  of  determining  cost  has 
become  a  topic  of  paramount  importance  in  many  lines  of  manu- 
facture and  merchandising  within  the  past  few  years,  and  a  great 
deal  of  time  and  thought  has  been  directed  towards  perfecting  and 
simplifying  cost-finding  in  many  branches  of  trade.  This  is  true 
not  only  of  the  manufacturer  but  of  the  merchant  as  well.  It  is  a 
subject  which  each  and  every  manufacturer  and  merchant  must 
master  before  success  rewards  his  efforts. 

The  wholesale  grocer,  for  instance,  prior  to  the  time  when  he 
had  mastered  this  subject,  was  content,  in  many  instances,  to  do 

3 

384492 


business  on  a  10  per  cent  gross  profit  basis;  but  since  becoming 
aware  of  the  fact  that  it  cost  him  8  per  cent,  on  an  average,  to 
handle  his  merchandise,  he  quickly  saw  that  it  was  necessary  for 
him  to  receive  more  than  10  per  cent  gross  profit  or  he  would  little 
more  than  break  even  at  the  end  of  the  year. 

The  subject  is  now  being  carefully  studied  by  the  retail  grocers, 
and  many  of  the  journals  affiliated  with  them  are  laying  great 
stress  on  the  importance  of  the  merchant  knowing  what  it  costs 
him  to  do  business.  One  of  the  leading  grocer  papers  that  I  have 
in  mind  has  gone  so  far  as  to  maintain  a  cost-finding  department, 
wherein  it  is  educating  the  merchants  upon  this  most  vital  and  im- 
portant subject.  This  work  is  very  commendable,  and  in  my 
opinion  should  be  taken  up  by  journals  affiliated  with  other  lines 
of  industry,  and  some  light  on  this  subject,  together  with  the  im- 
portance of  it,  should  be  driven  home  with  each  issue. 

A  little  over  a  year  ago,  I  was  appointed  on  a  committee,  to- 
gether with  your  worthy  president,  Mr.  L.  A.  Sears,  and  Mr.  C.  W. 
McEeynolds,  of  Kokomo,  Indiana,  to  prepare  an  article  on  the 
principles  of  cost  to  be  read  before  the  Western  Canners'  Associa- 
tion in  Chicago,  and  the  paper  which  I  am  now  reading  is  sub- 
stantially the  same  as  the  one  read  before  that  association,  and 
before  going  further  into  the  subject,  it  is  my  desire  to  inform 
you  that  much  of  the  matter  which  is  to  follow  was  furnished  by 
Mr.  Sears  and  Mr.  McReynolds,  and  it  is  my  wish  that  they  receive 
due  credit  therefor. 

Accurate  cost-accounting  has  been  neglected  by  many  manu- 
facturers in  sundry  lines,  and  several  decades  ago  was  not  of  the 
paramount  importance  that  we  find  it  to-day;  in  those  days  compe- 
tition was  less  keen,  and  the  manufacturer  would  put  a  price  on 
his  product  that  he  knew  to  be  high  enough  to  yield  him  a  good 
profit  after  allowing  liberal  leeway  in  his  supposed  cost,  but  those 
ideal  days  for  the  manufacturer  no  longer  prevail,  and  we  find 
ourselves  face  to  face  with  economic  conditions  which  are  bound  to 
be  the  undoing  of  the  manufacturer  who  is  not  ready  and  willing 
to  meet  them  by  studying  any  article,  book  or  document  that  will 

4 


in  any  manner  throw  light  on  this  important  problem.  He  can 
afford  to  neglect  nothing  which  will  aid  in  the  accuracy  and  ease 
with  which  his  cost  of  production  is  to  be  determined.  Here  is  a 
matter  in  which  guess-work  will  not  do,  and  where  a  fraction  of  a 
cent,  in  the  ultimate  findings,  is  of  serious  moment. 

Mr.  A.  H.  Eevell  says :  "  Considering  the  importance  of  figuring 
cost  of  products  to  the  finest  fraction,  the  ordinary  methods  of  com- 
putation are  surprising.  When  it  is  remembered  that  the  price  the 
manufacturer  is  to  receive  for  his  product,  and  consequently  the 
extent  of  his  profit,  depends  upon  the  exactness  with  which  he  is 
able  to  arrive  at  the  cost  of  production,  no  argument  will  be  needed  to 
make  plain  to  the  uninitiated  the  importance  of  this  factor  in  the 
manufacturer's  office  system.  However,  I  cannot  refrain  from 
affirming  that  here  is  the  common  stumbling-block,  so  far  as  the 
accounting  methods  of  the  manufacturer  are  concerned." 

I  think  that  Mr.  Chas.  J.  Watts  has  hit  the  bull's-eye,  as  far  as 
canners  are  concerned,  when,  in  his  work  on  cost-accounting,  he 
says :  "  To  devise  a  simple,  effective  and  economical  system  for 
securing  accurate  factory  costs  is  a  problem  many  manufacturers 
have  yet  to  solve.  In  these  days  of  fierce  competition,  the  average 
maker  of  a  standard  line  of  goods  is  tempted  to  use  the  selling 
price  of  his  competitors  as  a  guide  in  determining  his  own. 

"  But  he  cannot  be  certain  that  the  results  obtained  by  this  means 
will  insure  a  profit  under  the  conditions  peculiar  to  his  factory. 
He  is  at  all  times  confronted  with  the  idea  that  his  competitors  may 
be  more  progressive,  and  that  the  systems  employed  by  them  may 
facilitate  the  operations  in  their  factories  and  thus  reduce  the  cost 
of  production.  With  this  uncertainty  of  his  competitors'  methods 
and  systems,  he  cannot  with  safety  base  his  cost  simply  on  their 
selling  prices. 

"  Again,  the  manufacturer  who  operates  his  factory  on  the  basis 
of  the  cost  of  material  and  of  flat  labor,  adding  a  percentage  to 
cover  non-productive  labor,  manufacturing  expense  and  general 
expense,  as  well  as  contemplated  profits,  is  no  nearer  solution  of 
the  problem  of  factory  costs  than  the  one  relying  simply  on  the 
prices  charged  for  similar  goods  by  other  concerns." 

5 


This  brings  the  problem  right  home  to  the  canners,  and  it  is  an 
unquestioned,  though  unfortunate,  fact  that  most  prices  quoted  by 
them  are  based  upon  those  of  the  competitor  who  was  anxious  to  get 
his  books  filled  with  future  orders,  and  quoted  prices  on  futures 
early  to  get  in  ahead  of  the  others. 

It  does  not  follow  that  all  packers  who  come  onto  the  market 
later  with  their  prices  will  quote  just  the  same  prices  as  the  packer 
who  anticipated  them;  but  the  last  packer  on  the  market  will  take 
the  price  of  his  competitor  as  a  guide,  he  will  reason  to  himself 
that  he  can  get  the  same  price  for  his  product,  or  he  may  think 
that  he  is  entitled  to  a  few  cents  per  dozen  more,  or  possibly  less 
than  that  of  his  competitor;  but  the  fact  remains  that  he  uses  the 
first-named  prices,  rather  than  his  own  cost  of  production,  as  a 
basis  upon  which  to  fix  his  selling  price. 

We  fully  recognize  the  fact  that  prices  on  canned  goods  are  fre- 
quently regulated  by  the  time-worn  rule  of  supply  and  demand; 
this  more  generally  applies  to  spot  goods,  however,  and  futures 
cannot  be  said  to  be  so  much  affected  thereby. 

The  lack  of  accurate  information  regarding  cost  of  production 
is  responsible  for  many  packers  actually  seeking  to  close  future 
contracts  for  their  products,  in  which  they  are  bound  to  net  a  sub- 
stantial loss.  There  is  some  shadow  of  excuse  for  a  packer  who  is 
compelled,  through  force  of  circumstances,  to  sacrifice  some  of  his 
spot  holdings  in  order  to  liquidate  obligations,  or  perhaps  for  other 
causes,  but  it  is  unquestionably  the  height  of  commercial  folly  for 
him  to  contract  for  the  delivery  of  goods,  yet  unpacked,  at  prices 
that  he  does  not  know  will  make  him  a  profit,  and  he  cannot  pos- 
sibly know  where  is  the  dividing-line  between  profitable  and  un- 
profitable prices  unless  he  knows  accurately  his  cost  of  production. 

I  will  venture  the  assertion  that  there  is  no  class  of  manufacturers 
to-day  who  maintain  selling  prices  so  near  the  danger  mark  as  do 
the  packers  of  canned  goods,  and  in  few  branches  of  manufacture 
are  the  lines  so  hazardous.  It  is  the  one  class  of  manufacturers  who 
are  content  to  merely  exist,  and  who  base  selling  prices  on  precedent 
rather  than  on  actual  cost  of  production  determined  by  a  proper 
system  of  accounting. 

6 


It  is  not  the  purpose  of  this  report  to  cast  reflections  on  the 
business  ability  and  sagacity  of  all  the  packers,  for  I  know  that 
many  of  them  now  have  very  complete  accounting  systems,,  and  I 
am  indebted  to  several  of  them  for  information  used  in  formulating 
my  recommendations  for  a  system  to  be  adopted  by  those  packers 
who  have  not  yet  put  an  adequate  system  into  effect. 

I  am  also  indebted  to  many  other  authorities  on  economics  and 
cost-accounting  for  some  of  the  matter  contained  in  this  report. 

As  I  understand  my  duties,  they  are  to  outline  the  fundamental 
principles  of  cost-finding,  rather  than  to  say  arbitrarily  that  the 
cost  of  packing  corn,  tomatoes,  peas  or  what  not,  is  so  much  per 
dozen.  If  the  actual  cost  on  some  articles  were  mentioned  in  this 
meeting,  without  going  into  detail  as  to  the  method  used  in  de- 
termining the  figures,  many  packers  would  be  skeptical,  and  would 
say,  offhand,  "  Those  figures  are  too  high,  and  I  know  that  I  can 
pack  goods  at  a  lower  cost";  therefore,  I  have  decided  to  confine 
my  remarks  to  the  "  Principles  of  Cost "  and  make  suggestions 
which  I  hope  may  prove  of  value  to  members  of  the  fraternity  and 
enable  some  of  them  to  figure  a  little  closer  on  cost  than  they  have 
in  the  past. 

I  wish  to  say  that  I  have  studied  the  systems  of  several  cost- 
accounting  experts,  and  the  underlying  principles  are  all  the  same, 
though  some  of  them  express  some  phases  of  the  problem  in  different 
terms. 

I  wish  to  impress  upon  the  members  of  this  association,  that  they 
can  each  and  every  one  of  them  install  in  their  business  a  system 
of  cost-finding  which  will  be  accurate  enough  for  all  practical 
purposes.  The  packer  with  a  small  business,  and  packing  only  one 
line  of  fruits  or  vegetables,  will  find  the  task  much  more  simple 
than  the  packer  with  an  extensive  and  varied  assortment  of  prod- 
ucts; yet  the  principles  involved  are  identical.  The  packer  who 
cans  only  corn,  for  instance,  knows  that  his  entire  operating  cost, 
from  purchase  of  materials  to  depreciation  on  plant,  is  chargeable 
to  his  Canned  Corn  Account,  which  stands  the  burden  of  the  entire 
works;  it  is,  therefore,  a  simple  matter  to  determine  the  cost  on 

7 


any  article  packed  when  "  burden  "  or  "  overhead  "  charges  do  not 
have  to  be  apportioned  to  several  lines. 

The  most  essential  thing  in  cost-finding,  to  the  packer,  is  not  to 
overlook  any  one  item  which  enters  into  the  cost  of  his  product;  and 
instead  of  satisfying  himself  with  the  "  prime  "  or  "  factory  "  cost, 
he  should  determine  the  "  cost  to  make  and  sell." 

Most  authorities  on  cost-finding  divide  the  problem  into  three 
divisions ;  viz. : 

1.  Prime  cost,  or  cost  of  all  materials  used  plus  the  direct  labor. 

2.  Burden,  ofttimes  called  "  general "  or  "  overhead  "  expense. 

3.  Selling,  or  cost  to  market  the  product. 

The  subdivisions  under  the  above  heads  are  as  follows : 
Material  Cost  : 

1.  . 

2.  . 

3.  Box. 

4.  Cans. 

5.  Caps. 

6.  Solder. 

7.  Sugar. 

8.  Salt. 

9.  Tomato  sauce. 

10.  Meat. 

11.  Labels. 

12.  Tissue. 

13.  Direct  labor. 

14.  . 

Burden : 

15.  Salaries. 

16.  Interest. 

17.  Insurance. 

18.  Taxes. 

19.  Fuel,  light  and  water. 

20.  Maintenance. 

21.  Sundry  supplies. 


22.  Sundry  expense. 

23.  Indirect  labor. 

24.  Spoilage. 

25.  Loss  in  accounts. 

26.  Rents. 

27.  Legal  services. 

28.  Depreciation. 

29.  Storage. 

Selling  Cost: 

30.  Brokerage. 

31.  Travelling. 

32.  Salaries. 

33.  Advertising. 

34.  Demonstrations. 

35.  Samples. 

36.  Discounts. 

37.  Office  supplies. 

38.  Postage. 

39.  Freight. 

40.  Express. 

41.  Telegraph  and  telephone. 

Actual  Cost:    Total  of  the  above. 

PRIME  COST. 

Prime  cost,  or  cost  of  all  materials  used  plus  the  direct  labor,  is 
the  first  great  factor  in  the  cost  of  an  article  to  the  manufacturer, 
and  great  care  should  be  exercised  to  see  that  each  and  every  article 
of  raw  material  used  in  a  product  is  charged  against  it.  While 
some  of  the  items  may  appear  small  and  of  little  consequence,  you 
will  find  that  in  a  pack  there  are  a  number  of  such  items,  and  in  the 
aggregate  the  total  is  considerable. 

Every  material  entering  into  your  production  may  be  classed  as 
raw  material.  Mr.  H.  C.  Carey  says  in  his  manual  of  social  science : 
"  What,  however,  is  raw  material  ?  In  answer  to  this  question,  we 
may  say  that  all  of  the  products  of  the  earth  are,  in  turn,  finished 

9 


commodity  and  raw  material.  Coal  and  ore  are  the  finished  com- 
modity of  the  miner,  but  the  raw  material  of  pig  iron.  The  latter  is 
the  finished  commodity  of  the  smelter,  yet  only  the  raw  material 
of  the  puddler  and  of  him  who  rolls  the  bar.  The  bar,  again,  is 
the  raw  material  of  sheet-iron ;  that,  in  turn,  becomes  the  raw 
material  of  the  nail  and  spike.  These,  in  time,  become  the  raw 
material  of  the  house,  in  the  diminished  cost  of  which  are  con- 
centrated all  the  charges  in  the  various  stages  of  passage  from  the 
crude  ore  lying  useless  in  the  earth,  to  the  nail  and  spike,  the  ham- 
mer and  saw,  used  in  the  construction  of  a  dwelling." 

I  think  that  special  stress  should  be  placed  on  the  items  of  raw 
materials,  and  that  the  packer  should  be  impressed  with  the  fact 
that  the  waste  in  raw  materials  is  a  very  important  factor  in  hit* 
prime  cost,  and  frequently  amounts  to  several  cents  per  dozen  on 
the  cost  of  his  product. 

On  account  of  this  uncertain  item  of  waste,  it  is  practically  im- 
possible for  a  packer  to  determine  a  close  approximation  of  his 
cost,  except  by  closing  his  books  once  a  year  and  determining  the 
actual  quantities  of  raw  materials  bought  and  paid  for,  and  dividing 
the  amount  by  the  actual  number  of  cases  of  goods  packed  and 
marketable,  to  find  the  cost  per  case. 

I  think  there  is  too  much  of  a  tendency  among  packers,  in  their 
haphazard  method  of  determining  cost,  to  base  their  raw-material 
cost  on  some  test  runs,  whereby  they  find  that  a  ten  of  corn  will 
make  650  cans,  for  instance;  and  to  lose  sight  of  the  important  fact 
that  they  annually  pay  for  many  tons  of  corn,  as  well  as  other 
vegetables  or  friuts,  which  never  go  into  cans,  but  which  are  sorted 
out  on  account  of  being  too  mature,  or  imperfect  in  other  ways. 

There  is  no  fixed  rule  by  which  such  waste  can  be  figured,  as  it 
depends  almost  entirely  upon  the  caprices  of  the  elements  and  the 
season.  The  waste  on  other  items  of  raw  material  is  worthy  of 
consideration.  While  it  is  seldom  as  great  as  in  the  perishable  fruits 
and  vegetables,  nevertheless  there  are  thousands  of  cans  bought  and 
paid  for  which  are  not  used.  They  may  have  become  jammed,  or 
perhaps  rusted,  or  may  have  been  rendered  useless  through  some 

10 


other  cause.    The  same  will  apply  to  boxes,  labels  and  almost  every 
other  article  of  raw  material  purchased  by  the  packer. 

Mr.  Chas.  J.  Watts,  systematize!  and  factory-cost  accountant, 
says : 

"  Cost  on  material  may  be  subdivided  as  follows : 

Cost  of  Material: 
Material. 
Freight, 
Express. 
Drayage. 

"  The  elements  of  freight,  express  or  drayage  are  constituents  of 
cost  of  material.  In  figuring  on  material  the  cost  at  the  factory  is 
first  taken;  to  it  is  added  the  laying  down  the  material  at  your 
factory  door.  There  may  be  either  freight  or  express  charges  and 
also  drayage  charges  at  one  or  both  ends  of  the  line. 

"Transportation  charges  of  whatever  kind,  on  raw  material, 
should  be  so  distributed  as  to  be  borne  proportionately  by  material 
incurring  the  expense.  If  they  are  not,  and  freight,  express  and 
drayage  are  made  general  charges,  an  article  may  be  put  out  bear- 
ing a  disproportionate  burden  of  such  charges  wrongly  placed." 

Transportation  cost  should  be  charged  against  each  item  of  raw 
material  as  it  is  received.  The  can  account  should  be  charged  with 
freight  on  cans,  also  with  the  expense  of  unloading  and  stacking 
the  same.  The  same  practice  should  be  carried  out  with  every  other 
item  of  raw  material  received. 

I  recommend  that  every  packer  keep  a  stock  book.  In  this  stock 
book  should  be  a  debit  record  of  all  raw  materials  received  at  the 
f actory,  each  character  of  material  entered  under  its  proper  account. 
When  supplies  are  drawn  from  stock  to  be  used  in  the  course  of 
manufacture,  the  stock  accounts  should  be  credited  with  the 
materials  thus  drawn,  and  the  finished-commodity  account,  for 
which  the  materials  are  used,  should  be  charged  therewith.  Not 
only  is  this  important  in  your  cost-accounting  system,  but  the  stock 
book  is  an  up-to-date  inventory  of  all  raw  materials,  and  is  in- 
valuable as  a  reference  to  guide  you  in  purchasing  supplies. 

11 


Book  accounts  should  be  kept  for  each  article  of  raw  material 
which  is  used  in  any  quantity.  The  corn  packer  should  have  an 
Ear  Corn  Account,  against  which  he  should  charge  all  of  the  corn 
bought  from  farmers.  If  he  raises  his  own  corn,  he  should  charge 
the  rent  for  the  land  on  which  the  corn  is  grown,  against  this  ac- 
count; likewise  the  team  hire  and  other  farm  expense  incident  to 
growing  and  delivering  the  crop.  He  should  charge  his  Tomato 
Account  with  all  farm  rents,  expense,  etc.,  incurred  in  growing  and 
delivering  tomatoes;  and  so  on  down  the  entire  list  of  fruits  or 
vegetables  grown. 

The  packer  who  owns  the  land  upon  which  he  grows  his  canning 
crops  should  charge  rent  for  the  same  against  the  proper  account, 
just  the  same  as  though  he  had  to  pay  the  rent  out  to  others;  and 
the  amount  of  rent  thus  charged  should  be  based  on  the  prevailing 
rates  existing  in  that  locality. 

Such  items  as  cans,  boxes,  labels,  sugar,  salt,  solder  and  fuel 
should  also  have  special  ledger  accounts. 

For  minor  supplies,  such  as  flux,  salamoniac,  lubricating  oils, 
belts,  hose,  coppers,  etc.,  there  should  be  a  Sundry  Supplies  Account, 
which  properly  comes  under  the  head  of  burden  and  will  be  taken 
up  later. 

The  second  factor  in  prime  cost  is  direct  labor,  sometimes  termed 
productive  labor,  and  is  denned  by  Mr.  C.  E.  Woods  as  "  that  labor 
employed  in  a  plant,  whose  efforts  are  directed  solely  to  processing 
material  into  a  product  for  sale." 

Non-productive,  or  indirect  labor,  is  "that  labor  which  is  em- 
ployed in  a  plant,  whose  efforts  are  not  applied  to  the  processing  of 
material  into  a  product  for  sale." 

To  further  quote  Mr.  Woods :  "  This  division  should  be  strictly 
lived  up  to  for  the  reason  that  the  opportunity  for  lessening  costs  on 
a  given  output  requires  exactly  so  much  productive  labor,  and  this 
cannot  be  varied  except  by  a  very  small  percentage.  The  amount 
of  non-productive  labor  employed  on  a  given  output  is,  to  a  great 
extent,  a  question  of  administration,  and  consequently  is  subject  to 
a  much  greater  percentage  of  variation  than  is  productive  labor." 

12 


Direct  labor  is  the  one  concerned  in  prime  cost.  Indirect  labor 
is  one  of  the  subdivisions  of  burden,  and  will  be  taken  up  in  its 
proper  place. 

Direct  labor  should  be  charged  against  the  proper  finished-com- 
modity account,  and  we  recommend  a  system  of  time-keeping  which 
records  the  actual  amount  of  labor  directed  to  each  of  the  same. 
All  labor  directed  to  the  production  of  canned  corn  should  be 
charged  against  the  Canned  Corn  Account,  and  if  a  laborer's  time 
is  directed  to  several  accounts  during  one  day,  such  as  corn  and 
tomatoes  for  instance,  his  time  card  should  show  the  number  of 
hours  chargeable  to  Canned  Corn  and  the  number  of  hours  charge- 
able to  Canned  Tomatoes.  This  entails  a  little  more  work  for  the 
time-keeper,  but  it  is  of  absolute  necessity  if  an  accurate  cost- 
accounting  is  to  be  made. 

By  the  use  of  such  time  cards  your  bookkeeper  can  segregate  the 
items  when  making  up  the  pay-roll,  and  make  the  proper  charges 
against  each  of  the  finished-commodity  accounts. 

The  more  care  you  exercise  in  strict  classifications  of  your  pay- 
roll, the  more  accurate  will  be  your  cost-findings.  It  is  desirable 
to  have  as  little  of  the  pay-roll  as  possible  classified  as  indirect 
labor ;  as  this  is  one  of  the  subdivisions  of  burden,  it  must  be  spread 
over  your  entire  output,  and  if  you  charge  items  to  indirect  labor 
that  should  properly  be  charged  against  some  finished-commodity 
account,  your  ultimate  cost-findings  will  be  incorrect. 

Most  packers  are  now  familiar  enough  with  the  "prime  cost" 
division  of  the  subject  to  permit  me  to  take  up  the  second  and  more 
important  division,  called  burden,  and  its  subdivisions. 

When  I  refer  to  burden  as  being  of  more  importance,  it  is  not 
to  convey  the  impression  that  one  element  of  cost  is  of  any  greater 
moment  than  any  other  constituent  part  thereof,  but  because  of  the 
fact  that  in  this  division  lie  the  pitfalls  which  are  most  likely  to 
effect  the  correctness  of  your  cost-accounting. 

BURDEN. 

Burden  is  often  referred  to  as  "  overhead  "  cost,  and  is  frequently 
considered  as  an  indeterminable  quantity,  and  of  only  passing  im- 

13 


portance;  but  allow  me  to  assure  you  that  of  the  three  divisions  of 
cost,  it  is  the  one  which  decides  the  success  or  failure  of  the  manu- 
facturer. It  is  like  unto  the  stealthy  assassin  who  sneaks  upon  a 
man  in  the  prime  of  life  and  stabs  him  to  the  heart;  thus  the  very 
life-blood  of  many  an  apparently  successful  business  has  eked  away 
and  left  only  a  lifeless  skeleton  of  what  might  have  been  a  profit- 
able enterprise. 

We  cannot  urge  too  strongly  that  every  member  of  this  associa- 
tion take  proper  cognizance  of  the  importance  of  this  item,  and 
bear  in  mind  that  it  has  just  as  much  bearing  on  the  cost  of  pro- 
duction as  have  cans,  boxes  or  any  other  item. 

No  packer  would  presume  to  arrive  at  even  an  approximate  cost 
of  his  product  without  taking  into  consideration  the  exact  cost  of 
his  cans;  it  is  obvious  that  the  cost  of  any  one  item  entering  into 
the  total  cost  of  your  product  is  just  as  important  as  any  other  item 
for  the  purpose  of  accurate  cost-finding;  therefore  it  is  just  as 
essential  that  you  know  your  exact  burden  cost  per  dozen,  as  it  is 
to  know  the  can  cost  per  dozen,  as  you  cannot  determine  the  cost 
of  your  product  without  the  consideration  of  both. 

Burden  is  made  up  of  a  number  of  accounts  which  bear  indirectly 
upon  the  article  manufactured,  and  has  nothing  to  do  with  the 
principle  materials,  direct  labor  or  selling  expense,  and  may  be 
divided  as  follows: 

Salaries. 

Interest. 

Insurance. 

Taxes. 

Fuel,  light  and  water. 

Maintenance. 

Sundry  supplies. 

Sundry  expense. 

Indirect  labor. 

Spoilage. 

Loss  in  accounts. 

Rents. 

14 


Legal  services. 

Depreciation. 

Storage. 

As  before  mentioned,  the  packer  with  one  line  can  very  easily 
charge  all  of  these  items  against  his  one  line,  but  when  he  packs, 
say,  50,000  cases  of  corn,  30,000  cases  tomatoes,  15,000  hominy  and 
10,000  pumpkin,  how  is  he  going  to  apportion  it  to  make  each  line 
bear  its  proper  share  ? 

There  is  a  tendency  on  the  part  of  many  packers  to  make  their 
principal  product  stand  the  entire  burden,  and  not  charge  the 
proper  amount  against  their  so-called  "  side  lines."  In  this  manner, 
they  overestimate  the  cost  on  the  former  and  underestimate  the 
cost  on  the  latter. 

We  have  striking  evidence  of  this  practice  in  the  prevailing  low 
price  quoted  on  baked  beans,  pumpkin,  lye  hominy,  etc.  Usually 
these  articles  are  packed  as  side  lines,  and  the  packer  figures  that 
he  has  his  overhead  expense  or  burden  to  carry  anyway,  and  he 
therefore  packs  these  side  lines  without  considering  this  element  of 
cost.  This  practice  is  manifestly  incorrect  and  unfair,  as  each  item 
packed  should  stand  its  just  portion  of  the  burden. 

There  have  existed  various  methods  of  apportioning  the  burden 
to  the  various  lines,  but  the  percentage  plan  seems  to  be  the  one 
recognized  as  the  most  correct  by  cost-accountants.  Some  authori- 
ties hold  that  burden  should  be  apportioned  on  a  pro  rat  a  basis,  and 
that  it  should  be  figured  at  so  much  per  case,  and  the  same  amount 
of  burden  charged  against  each  case  of  goods  packed,  whether  it  be 
Petit  Pois  Peas  or  Standard  Lye  Hominy.  Obviously  this  system 
is  incorrect,  as  the  case  of  Petit  Pois  Peas  may  represent  three  times 
the  investment  of  the  case  of  Hominy :  it  is  apparent  that  the  actual 
cost  of  interest,  insurance,  spoilage,  taxes,  etc.,  is  say  three  times  as 
great  on  the  Petit  Pois  Peas  as  on  the  Hominy.  Therefore,  the 
percentage  plan  is  recognized  as  the  most  correct. 

For  the  purpose  of  determining  the  per  cent  of  burden  which  is 
chargeable  to  each  line,  let  us  first  find  the  approximate  value,  at 
selling  price,  of  the  yearly  output  of  each  article  packed;  the  ratio 

15 


of  the  total  value  of  each  line  to  the  grand  total  of  the  aggregate 
of  all  lines  packed  represents  the  per  cent  of  burden  chargeable  to 
each  line.  For  instance,  a  packer's  yearly  output  is  as  follows,  viz. : 

10,000  Extra  Sifted  Peas @  $1.35  $27,000.00 

20,000  Standard  Peas  @     1.00  40,000.00 

10,000  Pumpkin @       .45  9,000.00 

10,000  Tomatoes    @       .80  16,000.00 

8,000  Hominy @       .50  8,000.00 


Total $100,000.00 

It  is  at  once  apparent  that  27  per  cent  of  the  burden  is  charged 
againt  Extra  Sifted  Peas,  40  per  cent  against  Standard  Peas,  9  per 
cent  against  Pumpkin,  16  per  cent  against  Tomatoes  and  8  per  cent 
against  Hominy. 

Now  let  us  assume  that  the  aggregate  of  all  expenses  which  go  to 
make  up  burden  is  $10,000.00;  thus  we  find  that  the  proportion 
chargeable  to  Extra  Sifted  Peas  is  represented  by  27  per  cent  of 
$10,000.00,  or  $2700.00,  or  13%  cents  per  dozen  cans  for  the  10,000 
cases  of  Extra  Sifted  Peas  packed. 

By  carrying  the  figures  out  through  the  entire  line,  we  get  the 
following  "  burden  "  charges  per  dozen  for  each  line,  viz. : 

Ex.  Sftd.  Peas 27*  of  $10,000  =  $2,700.  -s-  20.000  doz.  =  13^c.  per  doz. 

Sftd.  Peas 40*"       "       =    4,000,  -*-  40,000    "    =  lOc.       "      " 

Pumpkin 9*"       "       =       900,  +  20,000    "    =   4^c.    " 

Tomatoes 16*"       "       =    1,600,  -*-  20,000     "    =   8c.       "      " 

Hominy 8*"       "       =       800,  •*•  16,000    "    =   6c.       "      " 

The  amounts  thus  determined,  plus  the  prime  cost  (material  and 
direct  labor),  make  what  is  called  "factory  cost,"  and  when  the 
selling  cost  is  added,  we  have  "  the  cost  to  make  and  sell/'  to  which 
we  must  add  our  desired  profit  to  arrive  at  our  selling  price. 

We  will  take  the  different  accounts  of  "  burden  "  and  treat  them 
separately. 

Salaries. — To  this  account  should  be  charged  the  salaries  of  all 
the  executive  officers,  the  superintendent,  shipping  clerk  or  any 
person  or  persons  on  salary  whose  attention  is  spread  over  the 
various  lines. 

16 


Interest. — This  item  requires  no  special  comment. 
Insurance. — To  include  insurance  of  all  kinds,  such  as  fire,  tor- 
nado, credit  or  accident. 

Taxes. — Here  we  have  another  item  that  is  self-explanatory,  and 
might  be  charged  in  the  sundry-expense  account  rather  than  to  open 
a  special  account  for  taxes,  as  the  account  would  usually  have  only 
one  or  two  entries  a  year,  and  it  is  hardly  worth  while  to  give  this 
item  an  account  to  itself. 

Fuel,  Light  and  Water. — To  this  account  should  be  charged  all 
fuel  used  for  power  or  heating,  such  as  coal,  wood  and  gasoline.  All 
•electric  current  for  power  or  light  should  also  be  charged  to  this 
account. 

Maintenance. — This  account  should  properly  be  divided  into  two 
accounts:  (1)  Maintenance  of  Buildings,  and  (2)  Maintenance  of 
Machinery.  Against  the  former  should  be  charged  all  bills  for  re- 
pairs on  buildings,  including  labor  thereon.  Against  Maintenance  of 
Machinery  should  be  charged  all  materials  and  work  necessary  to 
keep  the  machinery  in  proper  working  order,  such  as  new  steels  for 
cappers,  repairs  for  corn  cutters  or  any  other  machines,  also  belting, 
lacings,  sprocket  chains,  etc. 

Sundry  Supplies. — This  account  should  include  such  items  as 
machine  and  engine  oils,  cotton  waste,  lamp  globes,  mittens,  knives, 
baskets,  flux,  soldering  coppers,  rubber  hose  and  those  many  small 
articles  which  must  be  bought  or  replenished  each  year. 

Sundry  Expense. — This  account  to  include  such  items  as  tele- 
phone rent,  express,  freight  and  drayage  charges  on  sundry  supplies, 
travelling  expenses  to  conventions,  meetings,  etc.  It  might  also  in- 
clude taxes  and  legal  services,  as  well  as  other  items  of  expense 
which  cannot  properly  be  charged  against  the  other  accounts. 

Indirect  Labor. — This  is  labor  which  is  general  in  character  and 
is  not  Aharged  to  any  finished  commodity.  Night  watchman,  fire- 
man, teamster,  etc.,  properly  come  under  this  head. 

Spoilage. — This  item  more  appropriately  might  be  charged 
directly  against  the  account  which  is  concerned,  Canned  Corn,  Peas, 

17 


Tomatoes  or  what  not,  and  the  result  be  more  accurate  than  running 
it  through  the  Burden  Account. 

Loss  in  Accounts. — This  is  an  item  to  be  taken  care  of,  and  while 
sometimes  it  is  small,  again  it  is  a  matter  of  great  concern,  and  we 
think  should  be  based  on  the  averages  in  use  by  the  credit  in- 
demnity insurance  companies,  which  is  one-sixth  of  1  per  cent  on 
the  volume  of  business  done,  as  this  is  the  average  percentage  of 
losses  on  accounts,  covering  a  period  of  ten  years. 

Rents. — This  account  will  not  include  farm  rents  where  they  can 
be  charged  against  a  special  account,  such  as  Corn,  Tomatoes,  Peas 
or  any  other  vegetable  grown  on  such  rented  land.  It  will  include 
such  rents  as  office,  barn,  factory,  etc.,  and  if  the  packer  does  not 
have  a  great  number  of  such  rent  items,  he  might  simplify  matters 
by  charging  them  to  Sundry  Expense. 

Legal  Services. — This  item  might  better  be  charged  against  the 
Sundry  Expense  Account,  as  very  few  packers  employ  enough  "  legal 
services  "  to  render  it  advisable  for  a  special  account. 

Depreciation. — Depreciation  has  been  defined  as  a  lessening  in 
value  from  age  and  contributory  causes.  In  this  account  we  have 
a  very  important  one,  and  at  the  same  time  one  which  is  overlooked 
by  most  packers.  The  longer  a  packer  remains  in  the  business,  how- 
ever, the  more  he  is  impressed  with  the  fact  that  he  must  replace 
this  machine  or  that,  he  must  have  it  built  over,  or  in  many  in- 
stances he  must  discard  the  machine  entirely,  and  replace  it  with 
something  more  modern.  In  many  instances  the  machine  thus  dis- 
carded is  not  worn  out,  but  on  the  other  hand  is  in  fairly  good 
working  condition;  but  improved  methods  have  rendered  it  useless, 
and  the  packer  has  been  compelled  to  purchase  a  new  machine,  of 
some  character,  and  the  old  one  has  been  consigned  to  the  junk  pile ; 
it  is  dead. 

I  will  venture  the  assertion  that  there  is  not  a  packer  present, 
who  has  been  in  the  business  fifteen  years,  who  is  now  using  a  single 
piece  of  machinery  in  his  plant  that  he  used  fifteen  years  ago,  with 
the  possible  exception  of  engines  and  shafting,  and  a  great  many 

IS 


of  them  have  re-equipped  throughout  in  the  last  ten  years.  What  has 
become  of  the  old  machinery  which  was  installed  at  a  great  expense 
when  new  ?  It  has  simply  been  consumed,  gentlemen,  just  as  effect- 
ually consumed  as  the  coal,  the  cans,  the  boxes  and  everything  else 
which  you  have  bought  and  put  into  your  pack.  The  only  difference 
is  that  many  supplies  purchased  are  consumed  in  a  day,  a  week,  or 
possibly  a  year,  but  your  machinery  (and  buildings  may  be  included 
in  this  connection)  has  lasted  five  or  ten  years;  but  it  is  consumed 
and  gone  and  therefore  has  been  a  factor  in  your  cost  just  the  same 
as  those  articles  and  supplies  which  are  consumed  in  a  shorter  period. 

A  certain  per  cent  of  the  cost  of  machinery  and  buildings  should 
be  charged  off  each  year  for  depreciation,  and  the  amount  thus 
charged  off  should  be  added  to  the  cost  of  your  pack. 

Fire  insurance  companies  have  a  fixed  scale  upon  which  to  figure 
depreciation  on  buildings  and  machinery,  and  those  of  you  who  have 
had  fire  losses  have  doubtless  been  surprised  at  the  reckless  manner 
in  which  their  adjusters  knock  off  15  per  cent  here  and  30  per  cent 
there  for  depreciation  on  your  property. 

It  is  obvious  that  this  loss  by  depreciation  must  be  covered  each 
year  by  considering  it  a  portion  of  cost,  and  you  should  place  your 
selling  price  at  a  figure  to  amply  take  care  of  it. 

The  per  cent  of  depreciation  varies  on  different  characters  of 
buildings  and  machinery;  for  instance,  the  depreciation  on  a  brick 
or  stone  building,  with  slate  roof  and  cement  floors,  is  not  nearly 
so  great  as  that  on  frame  buildings.  The  following  percentages  are 
given  by  Tiffany,  a  recognized  authority  on  depreciation : 

"Brick  buildings,  slate  or  tin  roofs,  used  as  manufacturing  es- 
tablishments, where  there  is  heavy-running  machinery,  especially 
when  used  as  planing  mills  and  for  the  manufacture  of  sash,  doors 
and  blinds,  wagons,  hubs,  spokes,  furniture,  chairs  and  other  wood 
work,  depreciate  yearly  to  a  greater  extent  than  those  used  for 
less  hazardous  purposes,  and  a  fair  estimate  to  these  classes  would 
be  4  per  cent.  Frame  buildings  under  similar  conditions  depreciate 
5  per  cent.  With  shingle  or  gravel  roofs,  occupied  for  same  purposes 
as  described,  brick  buildings  depreciate  annually  4%  per  cent;  if 
frame,  6  per  cent." 

19 


You  will  note  that  the  percentages  mentioned  by  Mr.  Tiffany  had 
reference  to  buildings  containing  hard-running  machinery  at  very- 
high  speed,  so  that  the  incidental  vibration  was  a  great  factor  in 
fixing  the  percentages. 

Most  canning  factories  are  equipped  with  some  high-speed 
machinery  such  as  corn  cutters,  blowers,  fans,  etc.,  and  also  have 
one  factor  for  depreciation  which  is  absent  in  the  wood-working 
shop;  namely,  water  and  steam.  How  many  times  have  you  had 
to  patch  up  or  replace  rotten  floors  in  your  factories,  due  to  rot 
from  the  absorption  of  moisture  from  water  and  steam  ?  Not  only 
do  they  contribute  to  the  short  life  of  a  floor,  but  they  are  equally  a& 
damaging  to  a  metal  roof.  It  is  my  opinion  that  the  depreciation  on 
buildings  used  for  canning  factories  is  fully  as  great  as  that  men- 
tioned by  Mr.  Tiffany  on  buildings  containing  wood- working  ma- 
chinery, and  only  those  canning  factories  possessing  cement  or 
composition  floors  should  be  rated  lower.  I  recommend  the  follow- 
ing table  of  percentages  for  depreciation  on  buildings  used  for  can- 
ning factories ;  viz. : 

Brick,  stone  or  cement  building,  slate  or  tin  roof,  cement 

or  composition  floors  (where  water  is  used) 3  per  cent 

Brick,  stone  or  cement  buildings,  shingle,  gravel  or 

composition  roof,  wood  floors 5  per  cent 

Frame  buildings,  any  character  of  roof,  wood  floors. ...   6  per  cent 

Husking-sheds,  or  other  sheds,  on  brick,  stone  or  cement 
foundations 5  per  cent 

As  to  the  per  cent  of  depreciation  on  machinery,  I  will  say  that 
it  is  a  much  more  complicated  proposition  than  depreciation  on 
buildings,  and  depends  largely  on  the  care  taken  of  it.  We  will 
each  of  us  base  our  opinion  on  the  life  of  a  machine  on  our  own 
experience  with  such,  and  at  the  same  time  there  will  be  a  great 
variance  of  opinions.  For  instance,  you  ask  two  farmers  for  their 
opinion  on  the  life  of  a  binder;  the  one  who  leaves  his  binder  in 
the  field  where  he  got  through  using  it,  and  does  not  touch  it  again 
until  the  next  harvest,  will  probably  say  from  three  to  five  years, 

20 


while  the  fanner  who  takes  his  binder  to  his  tool  house  when  through 
with  the  season's  work,  cleans  and  oils  it  thoroughly  and  stores  it  in 
a  dry  place  until  the  next  harvest,  will  probably  say  from  ten  to 
twelve  years.  Likewise  there  will  be  a  variance  in  the  opinions  of 
packers  relative  to  the  life  of  canning  machinery.  I  have  seen  some 
packers  use  such  great  care  in  cleaning,  oiling  and  painting  their 
machinery,  when  through  with  a  season's  work,  that  it  will  look 
almost  like  brand-new  when  they  put  it  into  operation  the  following 
season;  and  on  the  other  hand,  I  have  seen  others  who,  like  the 
farmer  who  leaves  his  binder  in  the  field,  leave  all  of  their  machinery 
dirty  and  filthy,  and  wait  until  the  next  season  to  clean  it.  It  is 
needless  to  say  that  the  last-mentioned  packer  finds  it  necessary  to 
purchase  a  great  many  new  parts  when  getting  his  machinery  in 
readiness  for  his  next  season's  operations. 

There  is  one  thing  that  the  packer  who  takes  good  care  of  his 
machinery  cannot  get  away  from,  however,  and  that  is  the  death  of 
machinery  as  previously  mentioned;  therefore,  depreciation  and 
amortization  should  be  considered  jointly.  No  matter  what  par- 
ticular care  he  takes  of  his  machinery,  he  now  and  then  finds  that 
he  has  a  machine  which  is  out  of  date,  and  which  must  be  replaced 
with  a  machine  of  greater  capacity,  or  one  requiring  fewer  operators, 
that  he  may  get  his  labor  cost  down  on  a  footing  with  his  competi- 
tors; thus  he  has  a  dead  machine,  which  must  be  consigned  to  the 
junk  pile  or  possibly  traded  in  on  the  new  machine  at  a  price  slightly 
higher  than  scrap  iron. 

Tiffany  gives  the  average  life  of  a  steam  engine,  properly  set  and 
under  the  exclusive  charge  of  a  competent  engineer,  as  twenty  years, 
therefore  the  depreciation  would  be  5  per  cent.  A  steam  boiler,  he 
claims,  will  not  average  more  than  ten  years,  hence  10  per  cent 
depreciation  would  apply  thereon. 

The  life  of  most  special  machinery  in  use  by  canners,  we  would 
say,  will  not  exceed  ten  years,  and  while  it  is  true  that  the  deprecia- 
tion on  cast-iron  steam  chests  or  retorts  should  not  be  placed  so 
high,  to  offset  this  we  have  the  machinery  that  has  died  on  our 

21 


hands  after  one  to  five  years'  use.    So  it  appears  to  me  that  10  per 
cent  depreciation  on  machinery  should  be  charged  off  annually. 

Now  to  compensate  for  a  portion  of  the  depreciation  thus  charged 
off,  on  both  buildings  and  machinery,  the  item  of  maintenance, 
previously  referred  to,  must  be  considered.  The  percentages  of  de- 
preciation just  given  are  based  on  the  assumption  that  no  money 
or  work  is  spent  on  the  buildings  or  machinery  in  the  way  of  up- 
keep or  repairs ;  but  we  are  all  aware  of  the  fact  that  large  sums  are 
spent  annually  for  this  purpose,  and  such  expenditures  should  be 
deducted  from  the  depreciation  charged  off,  as  the  buildings  or 
machinery  have  been  renewed  to  the  extent  of  maintenance. 

Let  us  assume  that  the  cost  price  of  your  buildings  is  $25,000.00, 
and  that  they  are  of  that  character  of  construction  which  places 
them  in  the  5  per  cent  depreciation  class;  the  amount  to  charge  off 
would  be  $1250.00,  but  we  turn  to  our  maintenance  account  and 
find  that  during  the  year  we  have  put  in  a  new  floor  at  the  cost  of 
$500.00,  window  lights  amounting  to  $10.00,  have  painted  portions 
of  the  building  and  have  spent  a  total  of,  say,  $1000.00  on  main- 
tenance of  buildings.  This  $1000.00  should  be  deducted  from  the 
$1250.00  depreciation,  leaving  only  $250.00  net  to  be  charged  off. 
Let  us  go  still  further  and  assume  that  our  maintenance  account 
showed  that  we  had  spent  $2500.00  on  repairs  and  betterment  during 
the  year.  It  is  apparent  that  we  had  increased  the  value  of  our 
buildings  in  the  sum  of  $2500.00  less  the  annual  depreciation  of 
$1250.00.  An  instance  of  this  kind  would  therefore  show  a  net 
increase  in  the  building  account  of  $1250.00,  making  it  $26,250.00, 
instead  of  the  original  $25,000.00. 

The  same  practice  should  be  followed  in  the  depreciation  of  ma- 
chinery. In  this  manner  both  items  of  depreciation  and  main- 
tenance are  fairly  and  equitably  taken  care  of,  and  this  plan  meets 
with  the  approval  of  most  cost  authorities. 

Storage. — This  is  another  of  those  items  that  may  be  charged 
against  other  accounts  at  times,  as  you  will  know  whether  your 
storage  bill  is  for  corn,  peas  or  tomatoes,  and  it  may  be  charged 
against  the  proper  account  at  once. 

22 


Bear  in  mind  that  no  charge  should  at  any  time  be  made  against 
any  of  the  accounts  comprising  burden,  if  it  can  be  charged  to  any 
of  the  finished-products  accounts. 

It  is  now  near  the  time  when  most  packers  close  their  books  for 
the  year  and  take  off  their  annual  balance  sheets.  I  urge  that  each 
and  every  packer  take  his  accounts  and  go  over  them  in  detail, 
making  the  proper  charges  against  each  of  his  finished-products 
accounts,  and  that  he  ascertain  his  "  burden  "  or  "  overhead  "  cost 
and  apportion  it  to  his  several  lines  as  suggested  by  me. 

It  is  my  opinion  that  there  are  a  number  of  packers  who  do  not 
close  their  books  and  take  off  an  annual  balance  sheet,  but  are  con- 
tent to  see  how  much  money  they  have  in  the  bank  after  the  year's 
pack  has  been  delivered  and  obligations  paid ;  and  if  there  is  a  fair 
balance,  they  assume  that  they  have  made  a  profit  on  all  lines  packed 
by  them  during  the  year.  This  line  of  reasoning  may  be  far  from 
correct,  as  it  is  possible,  and  even  probable,  that  they  have  made  a 
profit  on  one  or  two  lines  and  sustained  an  actual  loss  on  others, 
but  so  long  as  the  business  has  shown  a  profit  in  the  aggregate,  they 
are  not  aware  of  the  losses  on  the  unprofitable  lines,  and  assume  that 
they  are  making  a  profit  on  everything  they  pack. 

I  cannot  urge  too  strongly  that  every  packer  maintain  an  account 
for  each  of  his  finished  products,  for  instance,  Canned  Corn,  Canned 
Tomatoes,  Canned  Pumpkin,  etc.;  and  that  each  such  account  be 
charged  with  those  items  which  properly  belong  to  it;  and,  when 
he  closes  his  books  at  the  end  of  his  fiscal  year,  that  he  determine  the 
proper  burden  and  selling  cost  chargeable  to  each  line,  and  that 
they  be  charged  with  it. 

It  is  not  necessary  that  every  packer  open  the  same  number  of 
accounts,  and  under  the  same  titles  as  I  suggest,  but  I  do  hold  that 
the  principles  outlined  are  essential  and  correct. 

I  recommend  that  each  packer  who  is  not  fully  informed  on  his 
cost,  go  into  the  matter  very  carefully  with  his  bookkeeper  and 
arrive  at  the  cost  of  his  product,  along  the  lines  suggested,  before 
naming  a  selling  price. 

I  think  that  if  this  course  is  followed  it  will  result  in  more  profit- 

23 


able  prices  being  realized  all  down  the  line,  and  will  add  thousands 
of  dollars  of  profits  to  the  packers  as  a  whole,  and  will  save  many 
others  from  bankruptcy,  who  are  now  drifting  that  way,  and  won- 
dering why. 

Some  of  you  will  possibly  be  surprised  at  the  actual  cost  of  pack- 
ing goods  when  the  cost  is  figured  on  a  scientific  and  correct  basis; 
and  I  request  that  you  reserve  your  criticism  until  you  have  com- 
puted your  own  cost  upon  the  same  basis,  which  I  insist  is  funda- 
mentally correct.  After  you  do  this,  I  think  you  will  have  no  criti- 
cism to  make. 

Bear  in  mind  that  when  your  goods  are  all  packed  and  in  the  ware- 
house, your  expense  has  not  ceased.  The  cost  of  marketing  many 
articles,  in  this  country,  actually  exceeds  the  cost  of  production; 
and  while  this  is  not  true  of  canned  goods,  nevertheless  the  cost  of 
marketing  them  is  of  great  importance.  I  will,  therefore,  now  call 
your  attention  to  a  number  of  items  which  go  to  make  up  selling 
cost,  which  I  have  divided  into  the  following  heads : 

Brokerage. 

Travelling. 

Salaries. 

Advertising. 

Demonstrations. 

Samples. 

Discounts. 

Office  supplies. 

Postage. 

Freight. 

Express. 

Telegraph  and  telephone. 

Brokerage. — This  is  an  item  which  is  very  familiar  to  you  all,  as 
most  of  you  sell  your  goods  through  brokers  on  a  2  per  cent  to  3  per 
cent  commission  basis.  This  means  an  added  cost  of  1%  cents  to 
3  cents  per  dozen,  depending  on  the  price  that  you  get  for  your 
goods,  and  the  rate  of  brokerage  which  you  pay.  I  will  add  right 

24 


here,  however,  that  the  most  economical  method  of  marketing  your 
product  is  through  the  brokers. 

Travelling. — This  is  an  item  of  expense  which  may  be  large  or 
small,  depending  on  whether  you  have  a  number  of  travelling  sales- 
men on  the  road,  or  just  call  on  your  trade  occasionally  with  a  view 
to  maintaining  a  personal  acquaintance,  or  to  placing  your  annual 
contracts.  It  is  an  item,  however,  that  very  few  packers  are  able 
to  eliminate  entirely,  and  frequently  will  amount  to  anywhere  from 
20  cents  to  40  cents  per  case  where  the  packer  maintains  a  force  of 
specialty  salesmen  who  work  the  retail  trade  and  turn  their  orders 
in  to  the  jobber. 

Before  any  work  of  this  kind  is  put  into  effect,  the  packer  should 
use  every  effort  to  post  himself  on  the  cost  of  specialty  work;  and 
this  cost  should  be  added  to  the  price  of  his  goods,  if  he  expects  to 
remain  in  business. 

Salaries. — This  pertains  to  salaries  of  persons  engaged  in  the 
sales  department  only,  whether  it  be  for  officials  and  clerks  who 
solicit  business  direct  from  the  office  through  correspondence,  or 
salesmen  on  the  road  calling  on  either  the  wholesale  or  the  retail 
trade  or  both. 

Advertising. — This  is  an  item  of  sales  expense  which  is  becoming 
imperative,  if  the  manufacturer  wishes  to  standardize  his  brands, 
and  create  a  demand  for  them  in  a  big  way,  at  profitable  prices,  re- 
garless  of  market  conditions.  This  is  a  phase  of  the  marketing  of 
goods,  however,  which  should  be  taken  up  with  an  efficient  adver- 
tising agency  and  thrashed  out  thoroughly  before  it  is  attempted 
at  all. 

While  advertising  is  the  road  to  success  for  meritorious  goods, 
if  the  plan  is  framed  up  along  the  right  lines,  with  the  proper  ap- 
propriation on  each  case  of  goods  sold,  and  the  proper  selling 
price  placed  thereon,  yet  it  is  a  hazardous  undertaking  for  the 
packer  inexperienced  in  this  method  of  selling,  and  who  has  not  the 
advantage  of  the  counsel  and  advice  of  some  advertising  agency 
which  has  proven  its  ability  to  handle  matters  of  this  character 
through  its  success  in  handling  other  accounts.  This  is  such  an 

25 


important  question,  however,  and  as  it  is  to  be  the  subject  of  another 
paper  to  be  read  at  this  convention,  I  will  say  no  more  about  it  here 
except  that  the  expense  of  advertising,  whether  large  or  small,  must 
be  added  to  the  cost  of  your  goods. 

Demonstrations. — This  is  an  item  of  expense  that  will  probably 
not  interest  a  great  number  of  the  packers,  as  I  am  of  the  opinion 
that  very  few  of  them  adopt  this  obsolete  method  of  introducing 
goods  to-day.  It  is  a  very  expensive  method,  and  is  not  permanent 
in  its  results  unless  followed  up  by  supplementary  advertising. 

Samples. — This  is  an  item  of  expense  which  is  common  to  all 
packers,  and  the  liberal  way  in  which  brokers  call  for  them  is  prima 
facie  evidence  that  they  have  large  families;  but  be  this  as  it  may, 
the  matter  of  samples  is  a  considerable  item  of  expense  and  to  most 
packers  amounts  to  several  hundred  cases  of  goods  per  annum.  Do 
not  overlook  this  item  when  you  reckon  your  cost. 

Discounts. — This  item,  which  I  have  put  under  the  head  of  selling 
expense,  doubtless  should  more  properly  be  an  item  of  burden  and 
may  be  classed  under  either  head  at  the  option  of  the  packer;  but 
handle  it  as  you  may,  it  is  an  expense  of  several  cents  per  case  on 
your  product  and  must  be  taken  into  account. 

Office  Supplies. — This  has  reference  to  those  office  supplies  used 
directly  in  the  sales  department,  and  this  expense  will  depend  upon 
the  system  in  use  in  your  office. 

Postage. — While  this  item  of  expense  is  here  considered  under  the 
head  of  sales,  it  is  not,  of  course,  all  properly  chargeable  against  this 
department,  but  such  a  large  percentage  of  your  postage  is  expended 
on  letters  relative  to  the  sale  and  delivery  of  your  goods,  that  this  is 
probably  the  most  appropriate  place  to  consider  it. 

Freight. — The  freight  considered  under  this  head  is  that  which  is 
paid  for  the  delivery  of  your  finished  product  when  the  same  is  not 
sold  upon  a  factory  basis. 

Express. — This  item  covers  express  charges  on  samples  and  ad- 
vertising matter,  or  any  other  express  charges  incidental  to  the  sale 
of  your  goods. 

26 


Telegraph  and  Telephone. — As  most  of  the  items  of  telegraph  and 
telephone  have  bearing  on  the  sale  and  delivery  of  goods,  the  expense 
of  the  same  should  be  charged  against  sales. 

I  think  that  the  different  accounts  that  I  have  outlined  under 
the  three  heads  of  prime  cost,  burden  and  selling  cost,  will  cover 
practically  every  item  of  expense  of  the  ordinary  packer,  and  I  wish 
to  assure  you  that  when  they  are  all  considered  you  will  find  an 
actual  cost  to  make  and  sell  your  product  away  in  excess  of  any  cost 
basis  that  you  may  have  wherein  you  have  failed  to  include  them. 

As  to  the  absolute  correctness  of  my  classification  of  accounts 
under  the  three  divisions,  this  is  a  matter  of  small  importance;  for 
instance,  I  may  have  placed  a  certain  item  of  expense  under  the 
head  of  burden,  and  you  may  be  of  the  opinion  that  it  should  be 
classed  under  the  head  of  prime  cost,  or  possibly  sales  cost,  and  you 
may  be  correct;  but  by  all  means  recognize  each  and  every  account 
mentioned  in  this  paper  as  a  legitimate  item  of  expense  which  must 
be  considered  somewhere  in  your  accounting,  if  you  expect  to  arrive 
at  the  actual  cost  of  your  goods. 

In  conclusion,  I  will  say  that  the  matter  of  cost-finding  is  not 
necessarily  a  complex  or  difficult  one.  Systems  can  be  employed 
which  go  to  the  extreme  in  detail,  and,  on  the  other  hand,  very 
simple  methods  can  be  put  into  successful  operation ;  just  remember 
that  every  dollar  that  you  spend  in  your  business  is  an  item  of  cost, 
whether  it  be  a  subscription  to  a  Fourth  of  July  celebration  or  in 
payment  for  a  car  of  cans.  The  packer  who  considers  all  of  these 
will  not  be  far  from  right  in  the  final  analysis. 


27 


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